QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2010

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from to

Commission File Number 001-33378

DISCOVER FINANCIAL SERVICES

(Exact name of registrant as specified in its charter)

Delaware

36-2517428

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2500 Lake Cook Road,

Riverwoods, Illinois 60015

(224) 405-0900

(Address of principal executive offices, including zip code)

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a
smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.) Yes ¨ No x

As of September 30, 2010, there were 544,589,409 shares of the registrants Common Stock, par value $0.01 per share,
outstanding.

We own or have rights to use the trademarks, trade names and service marks that we use
in conjunction with the operation of our business, including, but not limited to: Discover®,
PULSE®, Cashback
Bonus®,
Discover®
More® Card,
Discover®
MotivaSM Card,
Discover® Open
Road® Card,
Discover® Network and Diners Club
International®. All other trademarks, trade names and service marks included in this quarterly report on Form
10-Q are the property of their respective owners.

Description of Business. Discover Financial Services (DFS or the Company) is a leading credit card
issuer in the United States and an electronic payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. The Company is subject to
oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the Federal Reserve). Through its Discover Bank subsidiary, a Delaware state-chartered bank, the Company offers its customers credit cards,
other consumer loans and deposit products. Through its DFS Services LLC subsidiary and its subsidiaries, the Company operates the Discover Network, the PULSE Network (PULSE) and Diners Club International (Diners Club). The
Discover Network provides credit card transaction processing for Discover card-branded and third-party issued credit cards. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE
network with access to ATMs domestically and internationally, as well as point of sale terminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments network that grants rights to licensees, which are
generally financial institutions, to issue Diners Club branded credit cards and/or to provide card acceptance services. The Diners Club business also offers transaction processing and marketing services to licensees globally.

The Companys business segments are Direct Banking and Payment Services. The Direct Banking segment includes Discover card-branded
credit cards issued to individuals and small businesses on the Discover Network and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through the
Companys Discover Bank subsidiary. The Payment Services segment includes PULSE, Diners Club and the Companys third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties.

Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair presentation of the results for the quarter. All
such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial
statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated
financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Companys 2009 audited consolidated financial statements
filed with the Companys annual report on Form 10-K for the year ended November 30, 2009.

Recently Issued
Accounting Pronouncements

The application of the following guidance will only affect disclosures and therefore will
not impact the Companys financial condition, results of operations or cash flows.

In July 2010, the FASB issued ASU
No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No. 2010-20 requires a greater level of disaggregation in disclosures relating to the credit quality of the
Companys financing receivables and allowance for loan losses. Furthermore, ASU 2010-20 also requires enhanced disclosures around nonaccrual and past due financing receivables, impaired loans and loan modifications. The standard is effective
for the first interim or annual reporting periods ending on or after December 15, 2010, and will apply beginning with the Companys Form 10-Q for the quarter ending February 28, 2011.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers
into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net
basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements.
The Companys disclosures about fair value measurements, including the new disclosures which were applicable to the Company beginning in the second quarter 2010, are presented in Note 15: Fair Value Disclosures. The disclosures concerning gross
presentation of Level 3 activity are effective for fiscal years beginning after December 15, 2010.

In December 2008, the
FASB issued FASB Staff Position No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (codified within Accounting Standards Codification (ASC) Topic 715, Compensation-Retirement Benefits).
This standard provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. Required disclosures include a description of how investment allocation decisions are made, the inputs and
valuation techniques used to measure the fair value of plan assets and significant concentrations of risk. The standard is effective for fiscal years ending after December 15, 2009 and will first apply to the Companys Form 10-K for the
year ending November 30, 2010.

Statement
No. 166 amended the accounting for transfers of financial assets. Under Statement No. 166, the trusts used in the Companys securitization transactions are no longer exempt from consolidation. Statement No. 167 prescribes an
ongoing assessment of the Companys involvement in the activities of the trusts and the Companys rights or obligations to receive benefits or absorb losses of the trusts that could be potentially significant in order to determine whether
those variable interest entities (VIEs) will be required to be consolidated in the Companys financial statements. In accordance with Statement No. 167, the Company concluded it is the primary beneficiary of the Discover Card
Master Trust I (DCMT) and the Discover Card Execution Note Trust (DCENT) (the trusts) and accordingly, the Company began consolidating the trusts on December 1, 2009. Using the carrying amounts of the trust
assets and liabilities as prescribed by Statement No. 167, the Company recorded a $21.1 billion increase in total assets, a $22.4 billion increase in total liabilities and a $1.3 billion decrease in stockholders equity (comprised of a
$1.4 billion decrease in retained earnings offset by a $0.1 billion increase in accumulated other comprehensive income). These amounts were comprised of the following transition adjustments, which were treated as noncash activities for purposes of
preparing the condensed consolidated statement of cash flows:



Consolidation of $22.3 billion of securitized loan receivables and the related debt issued from the trusts to third-party investors;



Consolidation of $0.1 billion of cash collateral accounts and the associated debt issued from the trusts;

Reclassification of $2.3 billion of available-for-sale investment securities to loan receivables and reversal of $0.1 billion, net of tax, of related
unrealized losses previously recorded in other comprehensive income;

Recording of a $2.1 billion allowance for loan losses, not previously required under GAAP, for the newly consolidated and reclassified credit
card loan receivables;



Reversal of all amounts recorded in amounts due from asset securitization through (i) derecognition of the remaining $0.1 billion value of the
interest-only strip receivable, net of tax, (ii) reclassification of $0.8 billion of cash collateral accounts and $0.3 billion of accumulated collections to restricted cash, (iii) reclassification of $0.2 billion to unbilled accrued
interest receivable, and (iv) reclassification of $0.3 billion of billed accrued interest receivable to loan receivables; and

The assets of the consolidated VIEs include restricted cash and
certain credit card loan receivables, which are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. Liabilities of the consolidated VIEs include secured borrowings for which
creditors or beneficial interest holders do not have recourse to the general credit of the Company.

The Companys
statements of income for the three months and nine months ended August 31, 2010 no longer reflect securitization income, but instead report interest income, net charge-offs and certain other income associated with all securitized loan
receivables, and interest expense associated with debt issued from the trusts to third-party investors, in the same line items in the Companys statement of income as non-securitized credit card loan receivables and corporate debt.
Additionally, the Company no longer records initial gains on new securitization activity since securitized credit card loans no longer receive sale accounting treatment. Also, there are no gains or losses recorded on the revaluation of the
interest-only strip receivable as that asset is not recognizable in a transaction accounted for as a secured borrowing. Because the Companys securitization transactions are accounted for under the new accounting rules as secured borrowings
rather than asset sales, the cash flows from these transactions are presented as cash flows from financing activities rather than as cash flows from operating or investing activities.

The Companys statement of income for the three and nine months ended August 31, 2009 and its statement of financial condition
as of November 30, 2009 have not been retrospectively adjusted to reflect Statements No. 166 and 167. Therefore, current period results and balances will not be comparable to prior period amounts, particularly with regard to the following
(and their related subtotals):

The Companys investment securities consist of the following (dollars in thousands):

August 31,2010

November 30,2009

U.S. Treasury securities

$

1,552

$



U.S. government agency securities

1,004



States and political subdivisions of states

51,759

68,553

Other securities:

Certificated retained interests in DCENT and
DCMT(1)



4,501,108

Credit card asset-backed securities of other issuers

1,149,666

381,705

Asset-backed commercial paper notes



58,792

Residential mortgage-backed securities

10,630

12,929

Other debt and equity securities

11,136

12,210

Total other securities

1,171,432

4,966,744

Total investment securities

$

1,225,747

$

5,035,297

(1)

Upon adoption of Statements No. 166 and 167 on December 1, 2009, the amount outstanding at November 30, 2009 was reclassified to loan receivables. See
Note 2: Change in Accounting Principle for more information.

The amortized cost, gross unrealized gains and
losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in thousands):

Amount represents U.S. Treasury securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour
period.

(4)

Included in other debt securities at August 31, 2010 and November 30, 2009 are commercial advances of $8.3 million and $9.4 million, respectively, related to
the Companys Community Reinvestment Act strategies.

At August 31, 2010, the Company had 13 investments in credit card asset-backed
securities of other issuers and 3 investments in state and political subdivisions of states in an unrealized loss position. The following table provides information about investment securities with aggregate gross unrealized losses and the length of
time that individual investment securities have been in a continuous unrealized loss position as of August 31, 2010 and November 30, 2009 (dollars in thousands):

Less than 12 months

More than 12 months

FairValue

UnrealizedLosses

FairValue

UnrealizedLosses

At August 31, 2010

Available-for-Sale Investment Securities

Credit card asset-backed securities of other issuers

$

117,404

$

(18

)

$



$



Held-to-Maturity Investment Securities

State and political subdivisions of states

$



$



$

28,760

$

(2,375

)

At November 30, 2009

Available-for-Sale Investment Securities

Certificated retained interests in DCENT

$

1,149,143

$

(115,857

)

$

889,848

$

(10,152

)

Credit card asset-backed securities of other issuers

$

127,509

$

(34

)

$



$



Held-to-Maturity Investment Securities

Certificated retained interests in DCENT and DCMT

$

1,865,484

$

(430,655

)

$



$



State and political subdivisions of states

$



$



$

51,778

$

(6,162

)

During the nine months
ended August 31, 2010 and 2009, the Company received $560.3 million and $209.6 million of proceeds related to maturities, redemptions or liquidation of investment securities, respectively. During the same periods, the Company had no sales of
investment securities.

The Company records gains and losses on investment securities in other income when investments are
sold or liquidated, when the Company believes an investment is other than temporarily impaired prior to the disposal of the investment, or in certain other circumstances. During the three and nine months ended August 31, 2010, the Company
recorded losses of $0.6 million and $0.4 million, respectively, on other debt securities and a $19.6 million pretax gain related to the liquidation of collateral supporting the asset-backed commercial paper notes of Golden Key U.S. LLC, which had
invested in mortgage-backed securities. The investment was originally purchased in 2007 for $120.1 million, subsequently written down to $51.3 million and, in August 2010, liquidated for $70.9 million. During the three and nine months ended
August 31, 2009, the Company realized $7.4 million and $9.2 million of other than temporary impairment (OTTI), which was recorded entirely in earnings, the majority of which was related to Golden Key. As of August 31, 2010 and
November 30, 2009, no OTTI had been recorded in other comprehensive income.

The Company records unrealized gains and
losses on its available-for-sale investment securities in other comprehensive income. For the nine months ended August 31, 2010 and 2009, the Company recorded net unrealized losses of $2.5 million ($1.6 million after tax) and $66.1 million
($41.6 million after tax), respectively, in other comprehensive income. For the nine months ended August 31, 2010, the Company reversed an unrealized gain of $7.5 million ($4.7 million after tax) from other comprehensive income upon liquidation
of the collateral supporting the Golden Key investment. Additionally, the Company eliminated a net unrealized loss of $125.0 million ($78.6 million after tax) upon consolidation of its securitization trusts in connection with the adoption of
Statements No. 166 and 167 on December 1, 2009.

At August 31, 2010, the Company had $2.4 million of gross
unrealized losses on its held-to-maturity investment securities in states and political subdivisions of states, compared to $6.2 million of gross unrealized losses at November 30, 2009. The Company believes the unrealized loss on these
investments is the result of changes in interest rates subsequent to the Companys acquisitions of these securities and that the reduction in value is temporary. The Company does not intend to sell these investments nor does it expect to be
required to sell these investments before recovery of their amortized cost bases, but rather expects to collect all amounts due according to the contractual terms of these securities.

Amounts include $19.4 billion underlying investors interests in trust debt at August 31, 2010, and $15.4 billion and $9.9 billion in sellers interest
at August 31, 2010 and November 30, 2009, respectively. See Note 5: Credit Card Securitization Activities for more information.

(2)

Upon adoption of Statements No. 166 and 167 on December 1, 2009, the Company consolidated $22.3 billion of securitized loan receivables, reclassified $4.6
billion from investment securities to loan receivables and recorded a $2.1 billion allowance for loan losses. See Note 2: Change in Accounting Principle for more information.

(3)

Amount at August 31, 2010 includes $490.2 million of student loan receivables, which, along with accrued interest of $27.3 million, are pledged as collateral
against a long-term borrowing.

(4)

Federal student loans are guaranteed by the U.S. Department of Education. Private student loans are made directly to the student with no government guarantees.

Student loans held for sale, which are carried at the lower of cost or market, represent certain federal
student loans eligible for sale at August 31, 2010 to the U.S. Department of Education. See Note 18: Subsequent Events.

The following table provides changes in the Companys allowance for loan losses for the
three and nine months ended August 31, 2010 and 2009 (dollars in thousands):

For the Three Months EndedAugust 31,

For the Nine Months EndedAugust 31,

2010

2009

2010

2009

Balance at beginning of period

$

3,930,624

$

1,986,473

$

1,757,899

$

1,374,585

Addition to allowance related to securitized
receivables(1)





2,144,461



Additions:

Provision for loan losses

712,565

380,999

2,824,035

1,962,673

Deductions:

Charge-offs:

Discover card

(982,920

)

(541,272

)

(3,203,959

)

(1,560,820

)

Discover business card

(14,502

)

(18,400

)

(50,190

)

(43,671

)

Total credit card loans

(997,422

)

(559,672

)

(3,254,149

)

(1,604,491

)

Personal loans

(23,836

)

(20,920

)

(70,957

)

(46,186

)

Federal student loans

(11

)



(308

)



Private student loans

(660

)

(259

)

(1,264

)

(355

)

Other

(139

)



(858

)

(18

)

Total other consumer loans

(24,646

)

(21,179

)

(73,387

)

(46,559

)

Total charge-offs

(1,022,068

)

(580,851

)

(3,327,536

)

(1,651,050

)

Recoveries:

Discover card

121,255

45,214

341,337

144,901

Discover business card

875

272

2,516

602

Total credit card loans

122,130

45,486

343,853

145,503

Personal loans

421

231

942

615

Federal student loans









Private student loans

14



22



Other

35

22

45

34

Total other consumer loans

470

253

1,009

649

Total recoveries

122,600

45,739

344,862

146,152

Net charge-offs

(899,468

)

(535,112

)

(2,982,674

)

(1,504,898

)

Balance at end of period

$

3,743,721

$

1,832,360

$

3,743,721

$

1,832,360

(1)

Upon adoption of Statements No. 166 and 167 on December 1, 2009, the Company recorded a $2.1 billion allowance for loan losses related to newly consolidated
and reclassified credit card loan receivables. See Note 2: Change in Accounting Principle for more information.

Net charge-offs of principal are recorded against the provisions for loan losses, as shown
in the table above. Information regarding net charge-offs of interest and fee revenues on credit card loans is as follows (dollars in thousands):

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)

$

58,331

$

43,730

$

228,039

$

134,578

(1)

The amounts at August 31, 2010 include securitized loans as a result of the consolidation of the securitization trusts upon adoption of Statement No. 166 and
167 on December 1, 2009. See Note 2: Change in Accounting Principle for more information.

The Company
calculates its allowance for loan losses by estimating probable losses separately for segments of the loan portfolio with similar risk characteristics, which generally results in segmenting the portfolio by loan product type.

For its credit card loan receivables, the Company uses a migration analysis to estimate the likelihood that a loan receivable will
progress through various stages of delinquency and eventually charge off. In the first quarter 2010, the Company developed analytics which provide a better understanding of the likelihood that current accounts, or those that are not delinquent, will
eventually charge off. The Company used this information in combination with the migration analysis to determine its allowance for credit card loan losses at August 31, 2010. The Company does not identify individual loans for impairment, but
instead estimates its allowance for credit card loan losses on a pooled basis, which includes loans that are delinquent and/or no longer accruing interest.

Loan receivables that have been modified under troubled debt restructurings are evaluated separately from the pool of receivables that is
subject to the above analysis. Credit card loan receivables modified in a troubled debt restructuring are recorded at their present values with impairment measured as the difference between the loan balance and the discounted present value of cash
flows expected to be collected. Changes in the present value are recorded to the provision for loan losses.

For its other
consumer loans, the Company considers historical and forecasted estimate of incurred losses in estimating the related allowance for loan losses. In determining the proper level of the allowance for loan losses related to both credit card and other
consumer loans, the Company may also consider other factors, such as current economic conditions, recent trends in delinquencies and bankruptcy filings, account collection management, policy changes, account seasoning, loan volume and amounts,
payment rates and forecasting uncertainties.

Information regarding nonaccrual, past due and restructured loan receivables is
as follows (dollars in thousands):

August 31,2010(1)

November 30,2009

Loans not accruing interest

$

374,836

$

190,086

Loans over 90 days delinquent and accruing interest

$

928,521

$

522,190

Restructured
loans(2)

$

284,561

$

72,924

(1)

The amounts at August 31, 2010 include securitized loans as a result of the consolidation of the securitization trusts upon adoption of Statement No. 166 and
167 on December 1, 2009. See Note 2: Change in Accounting Principle for more information.

(2)

Restructured loans include $37.3 million and $9.7 million for the periods ended August 31, 2010 and November 30, 2009, respectively, that are also included in
loans over 90 days delinquent and accruing interest.

As part of certain collection strategies, the Company may place a customers account in
a permanent workout program under which the loan may be restructured, at which time the customers future borrowing privileges are suspended. Therefore, the Company has no commitments to lend additional funds to customers in a permanent workout
program. Such modifications are accounted for in accordance with ASC 310-40, Troubled Debt Restructuring by Creditors, under which loan impairment is measured based on the discounted present value of cash flows expected to be collected. All
of the Companys permanent workout loans, which are evaluated collectively on an aggregated basis, had a related allowance for loan losses.

At August 31, 2010 and November 30, 2009, the Company had included $104.6 million and $28.0 million, respectively, in its
allowance for loan losses for loans in its permanent workout program. Interest income on these loans is accounted for in the same manner as other accruing loans. Cash collections on these loans are allocated according to the same payment hierarchy
methodology applied to loans that are not in such programs. Additional information about loans in the Companys permanent workout program is shown below (dollars in thousands):

For the Three Months EndedAugust 31,

For the Nine Months EndedAugust 31,

2010(1)

2009

2010(1)

2009

Average recorded investment in loans

$

271,114

$

85,290

$

248,686

$

80,715

Interest income recognized during the time within the period these loans were
impaired(2)

$

765

$

252

$

2,107

$

715

Gross interest income that would have been recorded in accordance with the original
terms(3)

$

10,462

$

2,971

$

28,707

$

7,854

(1)

The amounts at August 31, 2010 include securitized loans as a result of the consolidation of the securitization trusts upon adoption of Statement No. 166 and
167 on December 1, 2009. See Note 2: Change in Accounting Principle for more information.

(2)

The Company does not separately track interest income on loans in its permanent workout program. Amounts shown are estimated by applying an average interest rate to the
average loans in the permanent workout program.

(3)

The Company does not separately track the gross interest income that would have been recorded if the loans in its permanent workout programs had not been restructured
and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on credit card accounts and the average interest rate earned on loans in
the permanent workout program to the average loans in the permanent workout program.

5.

Credit Card Securitization Activities

The Company accesses the term asset securitization market through DCMT and DCENT, which are trusts into which credit card loan receivables
are transferred (or, in the case of DCENT, into which beneficial interests in DCMT are transferred) and from which beneficial interests are issued to investors.

The DCMT debt structure consists of Class A, triple-A rated certificates and Class B, single-A rated certificates held by third
parties. Credit enhancement is provided by the subordinated Class B certificates, cash collateral accounts, and more subordinated Series 2009-CE certificates that are held by a wholly-owned subsidiary of Discover Bank. The DCENT debt structure
consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. In this structure, in order to issue senior, higher rated classes of notes, it is necessary to
obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower rated or more highly subordinated classes of notes. The majority of these more highly subordinated classes of notes are held by subsidiaries of
Discover Bank. In addition, there is another series of certificates (Series 2009-SD) issued by DCMT which provides increased excess spread levels to all other outstanding securities of the trusts. The Series 2009-SD certificates are held by a
wholly-owned subsidiary of Discover Bank. In January 2010, the Company increased the size of the Class D (2009-1) note and Series 2009-CE certificate to further support the more senior securities of the trusts. The Company was not contractually
required to provide this incremental level of credit enhancement but was permitted to do so pursuant to the trusts governing documents.

Subsequent to November 30, 2009, the Companys securitizations are accounted for
as secured borrowings and the trusts are treated as consolidated subsidiaries of the Company under ASC 810 and ASC 860. Accordingly, beginning on December 1, 2009, all of the assets and liabilities of the trusts are included directly on the
Companys consolidated statement of financial condition. Trust receivables underlying third-party investors interests are recorded in credit card loan receivablesrestricted for securitization investors, and the related debt issued
by the trusts is reported in long-term borrowingsowed to securitization investors. Additionally, beginning on December 1, 2009, certain other of the Companys retained interests in the assets of the trusts, principally consisting of
investments in DCMT certificates and DCENT notes held by subsidiaries of Discover Bank, now constitute intercompany positions, which are eliminated in the preparation of the Companys consolidated statement of financial condition. Trust
receivables underlying the Companys various retained interests, including the sellers interest in trust receivables, are recorded in credit card loan receivablesrestricted for securitization investors.

Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted
for use in meeting obligations to the trusts creditors. The trusts have ownership of cash balances that also have restrictions, the amounts of which are reported in restricted cashfor securitization investors. Investment of trust cash
balances is limited to investments that are permitted under the governing documents of the trusts and which have maturities no later than the related date on which funds must be made available for distribution to trust investors. With the exception
of the sellers interest in trust receivables, the Companys interests in trust assets are generally subordinate to the interests of third-party investors and, as such, may not be realized by the Company if needed to absorb deficiencies in
cash flows that are allocated to the investors in the trusts debt. The carrying values of these trust assets, which are presented on the Companys statement of financial condition as relating to securitization activities, are shown in the
table below (dollars in thousands):

August 31,2010

Cash collateral accounts

$

510,790

Collections and interest funding accounts

180,908

Restricted cashfor securitization investors

691,698

Investors interests held by third-party investors

14,871,057

Investors interests held by wholly owned subsidiaries of Discover Bank

4,511,478

Sellers interest

15,406,923

Loan receivablesrestricted for securitization
investors(1)

34,789,458

Allowance for loan
losses(1)

(2,756,199

)

Net loan receivables

32,033,259

Other

24,170

Carrying value of assets of consolidated variable interest entities

$

32,749,127

(1)

The Company maintains its allowance for loan losses at an amount sufficient to absorb probable losses inherent in all loan receivables, which includes all loan
receivables in the trusts. Therefore, credit risk associated with the transferred receivables is fully reflected on the Companys statement of financial condition in accordance with GAAP.

The debt securities issued by the consolidated VIEs are subject to credit, payment and interest rate risks on the transferred credit card
loan receivables. To protect investors, the securitization structures include certain features that could result in earlier-than-expected repayment of the securities. The primary investor protection feature relates to the availability and adequacy
of cash flows in the securitized pool of receivables to meet contractual requirements. Insufficient cash flows would trigger the early repayment of the securities. This is referred to as the economic early amortization feature.

Investors are allocated cash flows derived from activities related to the accounts comprising the securitized pool of
receivables, the amounts of which reflect finance charges billed, certain fee assessments, allocations of

merchant discount and interchange, and recoveries on charged-off accounts. From these cash flows, investors are reimbursed for charge-offs occurring within the securitized pool of receivables and
receive a contractual rate of return and Discover Bank is paid a servicing fee as servicer. Any cash flows remaining in excess of these requirements are reported to investors as excess spread. An excess spread rate of less than 0% for a
contractually specified period, generally a three-month average, would trigger an economic early amortization event. In such an event, the Company would be required to seek immediate sources of replacement funding. Apart from the restricted assets
related to securitization activities, the investors and the securitization trusts have no recourse to the Companys other assets or credit for a shortage in cash flows.

The Company is required to maintain a contractual minimum level of receivables in the trust in excess of the face value of outstanding
investors interests. This excess is referred to as the minimum sellers interest requirement. The required minimum sellers interest in the pool of trust receivables, which is included in credit card loan receivables restricted for
securitization investors, is set at approximately 7% in excess of the total investors interests (which includes interests held by third parties as well as those certificated interests held by the Company). If the level of receivables in the
trust was to fall below the required minimum, the Company would be required to add receivables from the unrestricted pool of receivables, which would increase the amount of credit card loan receivables restricted for securitization investors. If the
Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors interests would be triggered.

Another feature of the Companys securitization structure that is designed to protect investors interests from loss, which is
applicable only to the notes issued from DCENT, is a reserve account funding requirement in which excess cash flows generated by the transferred loan receivables are held at the trust. This funding requirement is triggered when DCENTs
three-month average excess spread rate decreases to below 4.50%, with increasing funding requirements as excess spread levels decline below preset levels to 0%.

In addition to performance measures associated with the transferred credit card loan receivables, there are other events or conditions
which could trigger an early amortization event. As of August 31, 2010, no economic or other early amortization events have occurred.

Investors interests include third-party interests and subordinated interests held by wholly-owned subsidiaries of Discover Bank.

3-Month RollingAverage
ExcessSpread(1)(2)(3)

Group excess spread percentage

12.86

%

DiscoverSeries excess spread percentage

12.28

%

(1)

DCMT certificates refer to the higher of the Group excess spread (as shown above) or their applicable series excess spread in assessing whether an economic early
amortization has been triggered. DiscoverSeries notes refer to the higher of the Group or DiscoverSeries excess spread (both of which are shown above) in assessing whether an economic early amortization has occurred.

(2)

Discount Series (DCMT 2009-SD), which was issued in September 2009, makes principal collections available for reallocation to other series to cover shortfalls in
interest and servicing fees and to reimburse charge-offs. Three-month rolling average excess spread rates reflect the availability of these additional collections.

(3)

Excess spread rates used in determining economic early amortization events and other triggers are reflective of the performance of all outstanding investors
interests, including subordinated interests held by wholly-owned subsidiaries of Discover Bank.

The Company continues to own and service the accounts that generate the loan receivables
held by the trusts. Discover Bank receives servicing fees from the trusts based on a percentage of the monthly investor principal balance outstanding. Although the fee income to Discover Bank offsets the fee expense to the trusts and thus is
eliminated in consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead to a termination of the servicing rights and the loss of future servicing income.

The following disclosures apply to securitization activities of the Company prior to December 1, 2009, when transfers of receivables
to the trusts were treated as sales in accordance with prior GAAP. At November 30, 2009, the Companys retained interests in credit card securitizations were accounted for as follows (dollars in thousands):

November 30,2009

Available-for-sale investment securities

$

2,204,969

Held-to-maturity investment securities

2,296,139

Loan receivables (sellers
interest)(1)

9,852,352

Amounts due from asset securitization:

Cash collateral
accounts(2)

822,585

Accrued interest receivable

519,275

Interest-only strip receivable

117,579

Other subordinated retained interests

220,288

Other

12,324

Amounts due from asset securitization

1,692,051

Total retained interests

$

16,045,511

(1)

Loan receivables net of allowance for loan losses were $9.1 billion at November 30, 2009.

(2)

$0.8 billion was pledged as security against a long-term borrowing.

Retained interests classified as available-for-sale investment securities at November 30, 2009 were carried at amounts that
approximated fair value with changes in the fair value estimates recorded in other comprehensive income, net of tax. Retained interests classified as held-to-maturity investment securities were carried at amortized cost. All other retained interests
in credit card asset securitizations were recorded in amounts due from asset securitization at amounts that approximated fair value.

Key estimates and sensitivities of fair values reported at November 30, 2009 of certain
retained interests to immediate 10% and 20% adverse changes in those estimates were as follows (dollars in millions):

The sensitivity analyses
of the interest-only strip receivable, cash collateral accounts and certificated retained beneficial interests are hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an estimate generally cannot be
extrapolated because the relationship of the change in the estimate to the change in fair value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of the interest-only strip receivable, specifically, is
calculated independent of changes in any other estimate; in practice, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower payments and increased charge-offs), which might
magnify or counteract the sensitivities. In addition, the sensitivity analyses do not consider any action that the Company may take to mitigate the impact of any adverse changes in the key estimates.

During the three and nine months ended August 31, 2009, the Company recognized a net revaluation of its subordinated retained
interests, principally the interest-only strip receivable, consisting of a $68.9 million gain and a $122.3 million loss, respectively, in securitization income in the condensed consolidated statements of income. For the three and nine months ended
August 31, 2009, the Company securitized $1.5 billion and $2.2 billion of receivables, which resulted in an initial gain of $7.9 and $8.8 million for the respective periods.

Key estimates used in
measuring the fair value of the interest-only strip receivable at the date of securitization that resulted from credit card securitizations completed during the nine months ended August 31, 2009 were as follows:

For the Nine
MonthsEndedAugust 31, 2009

Weighted average life (in months)

1.8  4.8

Payment rate (rate per month)

17.18%  17.66%

Principal charge-offs (rate per annum)

9.66%  9.81%

Discount rate (rate per annum)

16.00%

The tables below
present quantitative information about delinquencies and net principal charge-offs of securitized and non-securitized credit card loans for periods in which transfers of receivables to the securitization trusts were accounted for as sales (dollars
in millions):

The Company
offers its deposit products, including certificates of deposit, money market accounts, online savings accounts and Individual Retirement Account (IRA) certificates of deposit to customers through two channels: (i) through direct marketing,
internet origination and affinity relationships (direct-to-consumer deposits); and (ii) indirectly through contractual arrangements with brokerage firms (brokered deposits). During the nine months ended August 31,
2010, the Company acquired approximately $1 billion of direct-to-consumer deposit accounts from a third party. As of August 31, 2010 and November 30, 2009, the Company had approximately $19.1 billion and $12.6 billion, respectively, of
direct-to-consumer deposits and approximately $15.1 billion and $19.5 billion, respectively, of brokered deposits.

A summary
of interest-bearing deposit accounts is as follows (dollars in thousands):

August 31,2010

November 30,2009

Certificates of deposit in amounts less than
$100,000(1)

$

20,864,065

$

22,587,898

Certificates of deposit from amounts of
$100,000(1) to less than
$250,000(1)

4,358,026

2,918,004

Certificates of deposit in amounts of
$250,000(1) or greater

1,163,140

1,129,945

Savings deposits, including money market deposit accounts

7,763,701

5,392,659

Total interest-bearing deposits

$

34,148,932

$

32,028,506

Average annual interest rate

3.18

%

3.94

%

(1)

$100,000 represents the basic insurance amount previously covered by the FDIC although, effective July 21, 2010, the basic insurance per depositor was permanently
increased to $250,000.

At August 31, 2010, certificates of deposit maturing during the remainder of 2010,
the next four years and thereafter were as follows (dollars in thousands):

Long-term borrowings consist of borrowings and capital leases having original maturities of one year or more. The following table provides
a summary of the Companys long-term borrowings and weighted average interest rates on balances outstanding at period end (dollars in thousands):

August 31, 2010

November 30, 2009

Interest RateTerms

Maturity

Outstanding

InterestRate

Outstanding

InterestRate

Discover Card Master Trust I and Discover Card Execution Note Trust

Fixed rate asset-backed securities(1)

$

2,598,208

5.47

%

$





5.10% to

5.65% fixed

Various April 2011September 2017

Floating rate asset-backed
securities(1)

10,771,057

0.75

%





1-month LIBOR(2) +3 to 130 basis points

Various November 2010July 2014

Floating rate asset-backed
securities(1)

1,250,000

0.88

%





3-month LIBOR(2) +34 basis points

December 2012

Floating rate asset-backed
securities(1)

250,000

1.00

%





Commercial Paperrate + 70 basis points

April 2013

Total Long-Term Borrowingsowed to securitization investors

14,869,265



Discover Financial Services (Parent Company)

Floating rate senior notes





400,000

0.83

%

3-month LIBOR(2)

+ 53 basis points

June 2010

Fixed rate senior notes due 2017

399,447

6.45

%

399,385

6.45

%

6.45% fixed

June 2017

Fixed rate senior notes due 2019

400,000

10.25

%

400,000

10.25

%

10.25% fixed

July 2019

Discover Bank

Subordinated bank notes due 2019

698,337

8.70

%

698,202

8.70

%

8.70% fixed

November 2019

Subordinated bank notes due 2020

496,666

7.00

%





7.00% fixed

April 2020

Floating rate secured borrowing(3)

104,476

0.80

%

528,246

0.74

%

Commercial Paperrate + 50 basis points

December 2010(3)

Floating rate secured borrowing(3)

236,050

0.73

%





1-month LIBOR(2)

+ 45 basis points

December 2010(3)

Floating rate secured borrowing(4)

503,935

0.76

%





Commercial Paper rate + 50 basis points

August 2013(4)

Capital lease obligations

577

6.26

%

2,268

6.26

%

6.26% fixed

Various

Total Other Long-Term Borrowings

2,839,488

2,428,101

Total long-term borrowings

$

17,708,753

$

2,428,101

(1)

Upon adoption of Statements No. 166 and 167 on December 1, 2009, the Company consolidated $22.3 billion of securitized loan receivables and the related debt
issued from the trusts to third-party investors. See Note 2: Change in Accounting Principle for more information. Asset-backed securities are collateralized by loan receivables as described in Footnote 5: Credit Card Securitization Activities.

(2)

London Interbank Offered Rate (LIBOR).

(3)

This loan facility was entered into to fund cash collateral account loans, which provide credit enhancement to certain DCMT certificates. Repayment is dependent upon
the available balances of the cash collateral accounts at the various maturities of underlying securitization transactions, with final maturity in December 2010. The facility has two funding agents, one of which re-priced from commercial paper
conduit costs to LIBOR-based pricing effective in July 2010.

(4)

Under a program established by the U.S. Department of Education, this loan facility was entered into to fund certain federal student loans. Principal and interest
payments on the underlying student loans will reduce the balance of the secured borrowing over time, with final maturity in August 2013.

The Company has an unsecured credit agreement that is effective through May 2012. The
agreement provides for a revolving credit commitment of up to $2.4 billion (of which the Company may borrow up to 30% and Discover Bank may borrow up to 100% of the total commitment). As of August 31, 2010, the Company had no outstanding
balances due under the facility. The credit agreement provides for a commitment fee on the unused portion of the facility, which can range from 0.07% to 0.175% depending on the index debt ratings. Loans outstanding under the credit facility bear
interest at a margin above the Federal Funds rate, LIBOR, the Euro Interbank Offered Rate or the Euro Reference rate. The terms of the credit agreement include various affirmative and negative covenants, including financial covenants related to the
maintenance of certain capitalization and tangible net worth levels, and certain double leverage, delinquency and Tier 1 capital to managed loans ratios. The credit agreement also includes customary events of default with corresponding grace
periods, including, without limitation, payment defaults, cross-defaults to other agreements evidencing indebtedness for borrowed money and bankruptcy-related defaults. The commitment may be terminated upon an event of default.

The Company also has access to committed undrawn capacity through privately placed asset-backed conduits through bilateral agreements to
support the funding of its credit card loan receivables. As of August 31, 2010, the total commitment of secured credit facilities through private providers was $3.0 billion, of which $0.3 billion had been used and was included in long-term
borrowingsowed to securitization investors at August 31, 2010. Access to the unused portions of the secured credit facilities expires in 2012 and 2013. Borrowings outstanding under each facility bear interest at a margin above
asset-backed commercial paper costs of each individual conduit provider. The terms of each agreement provide for a commitment fee to be paid on the unused capacity, and include various affirmative and negative covenants, including performance
metrics and legal requirements similar to those required to issue any term securitization transaction.

8.

Preferred Stock

On
April 21, 2010, the Company completed the repurchase of all the outstanding shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) issued to the U.S. Department of the Treasury
under the Capital Purchase Program of the Troubled Asset Relief Program on March 13, 2009 for $1.2 billion.

The
Preferred Stock was issued at a discount to reflect the value of the warrant (the Warrant) to purchase 20,500,413 shares of common stock of the Company issued to the U.S. Treasury in connection with the initial sale of the Preferred
Stock. As a result of the repurchase of the Preferred Stock, at the redemption date the Company accelerated the accretion of the remaining discount of $61 million. On July 7, 2010, the Company repurchased the Warrant from the U.S Treasury for
$172 million.

The Company sponsors defined benefit pension and other postretirement plans for its eligible U.S. employees. However, as of
December 31, 2008, the pension plans no longer provide for the accrual of future benefits. For more information, see the Companys annual report on Form 10-K for the year ended November 30, 2009.

Net periodic benefit (income) cost expensed by the Company included the following components (dollars in thousands):

The following table reconciles the Companys effective tax rate to the U.S. federal statutory income
tax rate:

For the Three Months EndedAugust 31,

For the Nine Months EndedAugust 31,

2010

2009

2010

2009

U.S. federal statutory income tax rate

35.0

%

35.0

%

35.0

%

35.0

%

U.S. state and local income taxes and other, net of U.S. federal income tax benefits

4.8

3.5

4.3

3.4

Valuation allowancecapital loss







1.5

Non-deductible compensation

0.1

0.1

0.5

0.5

Other

(0.2

)

0.2

(0.5

)



Effective income tax rate

39.7

%

38.6

%

39.3

%

40.4

%

The Company is under continuous examination by the IRS and the tax authorities for various states. The tax
years under examination vary by jurisdiction; for example, the current IRS examination covers 1999 through 2005. The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions resulting from these and
subsequent years examinations.

As part of its audit of 1999-2005, the IRS has proposed additional tax assessments. The
Company filed an appeal with the IRS to protest the proposed adjustments. The outcome of the appeal is not certain and the matter is in the preliminary stage. The Company believes that its reserve is sufficient to cover any penalties or interest
that would result from an increase in federal taxes due.

Effective December 1, 2009, the Company adopted new accounting guidance on earnings per share, which clarifies that unvested
stock-based payment awards that contain nonforfeitable rights to dividends are participating securities and should be included in computing earnings per share (EPS) using the two-class method. The Company grants restricted stock units
(RSUs) to certain employees under its stock-based compensation programs, which entitle the recipients to receive nonforfeitable dividend equivalents in the same amount and at the same time as dividends paid to all common stockholders;
these unvested awards meet the definition of participating securities. Under the two-class method, all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities, based on their respective
rights to receive dividends. In accordance with the transition guidance, prior period EPS amounts have been restated to conform to current period presentation, although there was no material impact on the previously reported basic or diluted EPS.

The following table presents the calculation of basic and diluted EPS (dollars and shares in thousands, except per share
amounts):

For the Three Months EndedAugust 31,

For the Nine Months EndedAugust 31,

2010

2009

2010

2009

Numerator:

Net income

$

260,617

$

577,454

$

415,146

$

923,648

Preferred stock dividends



(15,307

)

(23,811

)

(28,573

)

Preferred stock discount accretion



(2,760

)

(66,492

)

(6,048

)

Net income available to common stockholders

260,617

559,387

324,843

889,027

Income allocated to participating securities

(2,423

) )

(6,459

)

(3,230

)

(12,521

)

Net income allocated to common stockholders

$

258,194

$

552,928

$

321,613

$

876,506

Denominator:

Weighted average common shares outstanding

544,314

513,098

543,874

491,839

Effect of dilutive common stock equivalents

2,768

3,952

6,237

920

Weighted average common shares outstanding and common stock equivalents

547,082

517,050

550,111

492,759

Basic earnings per share

$

0.47

$

1.08

$

0.59

$

1.78

Diluted earnings per share

$

0.47

$

1.07

$

0.58

$

1.78

The following
securities were considered anti-dilutive and therefore were excluded from the computation of diluted EPS (shares in thousands):

For the ThreeMonths EndedAugust 31,

For the NineMonths EndedAugust 31,

2010

2009

2010

2009

Unexercised stock options

3,944

4,319

3,418

4,414

12.

Capital Adequacy

The
Company is subject to capital adequacy guidelines of the Federal Reserve, and Discover Bank (the Bank), the Companys main banking subsidiary, is subject to various regulatory capital requirements as administered by the Federal
Deposit Insurance Corporation (the FDIC). Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial position and results of the Company and the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of

assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (as defined in the regulations) of total risk-based capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of
August 31, 2010, the Company and the Bank met all capital adequacy requirements to which they were subject.

Under
regulatory capital requirements, the Company and the Bank must maintain minimum levels of capital that are dependent upon the risk-weighted amount or average level of the financial institutions assets, specifically (a) 8% to 10% of total
risk-based capital to risk-weighted assets (total risk-based capital ratio), (b) 4% to 6% of Tier 1 capital to risk-weighted assets (Tier 1 risk-based capital ratio) and (c) 4% to 5% of Tier 1 capital to average
assets (Tier 1 leverage ratio). To be categorized as well-capitalized, the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. As of
August 31, 2010, the Company and the Bank met the requirements for well-capitalized status and there have been no conditions or events that management believes have changed the Companys or the Banks category.

The following table shows the actual capital amounts and ratios of the Company and the Bank as of August 31, 2010 and
November 30, 2009 and comparisons of each to the regulatory minimum and well-capitalized requirements (dollars in thousands):

Actual

Minimum CapitalRequirements

Capital Requirements To BeClassified asWell-Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

August 31,
2010(1) :

Total risk-based capital (to risk-weighted assets)

Discover Financial Services

$

7,595,473

15.5

%

$

3,931,518

³

8.0

%

$

4,914,398

³

10.0

%

Discover Bank

$

7,601,827

15.7

%

$

3,876,790

³

8.0

%

$

4,845,987

³

10.0

%

Tier 1 capital (to risk-weighted assets)

Discover Financial Services

$

5,747,535

11.7

%

$

1,965,759

³

4.0

%

$

2,948,639

³

6.0

%

Discover Bank

$

5,762,334

11.9

%

$

1,938,395

³

4.0

%

$

2,907,592

³

6.0

%

Tier 1 capital (to average assets)

Discover Financial Services

$

5,747,535

9.5

%

$

2,417,397

³

4.0

%

$

3,021,746

³

5.0

%

Discover Bank

$

5,762,334

9.7

%

$

2,385,823

³

4.0

%

$

2,982,279

³

5.0

%

November 30, 2009:

Total risk-based capital (to risk-weighted assets)

Discover Financial Services

$

9,516,965

17.9

%

$

4,262,230

³

8.0

%

$

5,327,788

³

10.0

%

Discover Bank

$

8,210,450

15.8

%

$

4,168,103

³

8.0

%

$

5,210,129

³

10.0

%

Tier 1 capital (to risk-weighted assets)

Discover Financial Services

$

8,139,309

15.3

%

$

2,131,115

³

4.0

%

$

3,196,673

³

6.0

%

Discover Bank

$

6,572,320

12.6

%

$

2,084,052

³

4.0

%

$

3,126,077

³

6.0

%

Tier 1 capital (to average assets)

Discover Financial Services

$

8,139,309

18.1

%

$

1,798,937

³

4.0

%

$

2,248,672

³

5.0

%

Discover Bank

$

6,572,320

15.9

%

$

1,657,397

³

4.0

%

$

2,071,746

³

5.0

%

(1)

Upon adoption of Statements No. 166 and 167 on December 1, 2009, the Company recorded a $1.4 billion reduction to retained earnings, which reduced total
capital and Tier 1 capital by the same amount, and a $21.1 billion increase to total assets, which impacted average assets. See Note 2: Change in Accounting Principle for more information. Risk-weighted assets were not significantly impacted by the
adoption of Statements No. 166 and 167 as the Company began including securitized assets in its risk-weighted asset calculation beginning in the third quarter 2009 due to actions it took to adjust the credit enhancement structure of the
securitization trusts.

Lease commitments. The Company leases various office space and equipment under capital and non-cancelable operating leases which
expire at various dates through 2018. At August 31, 2010, future minimum payments on leases with original terms in excess of one year consist of the following (dollars in thousands):

CapitalizedLeases

OperatingLeases

2010

$

197

$

1,526

2011

395

5,511

2012



6,172

2013



4,662

2014



4,616

Thereafter



16,342

Total minimum lease payments

592

$

38,829

Less: Amount representing interest

15

Present value of net minimum lease payments

$

577

Unused commitments to extend credit. At August 31, 2010, the Company had unused
commitments to extend credit for consumer and commercial loans of approximately $166 billion. Such commitments arise primarily from agreements with customers for unused lines of credit on certain credit cards and certain other consumer loan
products, provided there is no violation of conditions in the related agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically
reviewed based on account usage, customer creditworthiness and loan qualification.

Secured Borrowing Representations and
Warranties. As part of the Companys financing activities, the Company provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to specified guidelines. Due diligence is
performed by the Company which is intended to ensure that asset guideline qualifications are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace, repurchase or sell such assets.
In its credit card securitization activities, the Company would replace nonconforming receivables through the allocation of excess sellers interest or from additional transfers from the unrestricted pool of receivables. If the Company could
not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors interests would be triggered.

The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances
of third-party investor interests in credit card asset-backed securities plus the principal amount of any other outstanding secured borrowings. The Company has recorded substantially all of the maximum potential amount of future payments in
long-term borrowings on the Companys statement of financial condition. The Company has not recorded any incremental contingent liability associated with its secured borrowing representations and warranties. Management believes that the
probability of having to replace, repurchase or sell assets pledged as collateral under secured borrowing arrangements, including an early amortization event, is low.

Guarantees. The Company has obligations under certain guarantee arrangements, including contracts and indemnification agreements,
which contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently
require the Company to make payments to a guaranteed party based on another entitys failure to perform under an agreement. The Companys use of guarantees is disclosed below by type of guarantee.

Counterparty Settlement Guarantees. Diners Club and DFS Services LLC, on behalf of
PULSE, have various counterparty exposures, which are listed below.



Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants, which generally include
travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a counterparty exposure if a licensee
fails to meet its financial payment obligation to one of these merchants.



ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS Services LLC retains
counterparty exposure if an issuer fails to fulfill its settlement obligation.

The maximum potential amount
of future payments related to such contingent obligations is dependent upon the transaction volume processed between the time a counterparty defaults on its settlement and the time at which the Company disables the settlement of any further
transactions for the defaulting party, which could be up to one month depending on the type of guarantee/counterparty. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether particular counterparties
will fail to meet their settlement obligations. While the Company has contractual remedies to offset these counterparty settlement exposures, in the event that all licensees and/or issuers were to become unable to settle their transactions, the
Company estimates its maximum potential counterparty exposures to these settlement guarantees, based on historical transaction volume of up to one month, would be as follows:

August 31,2010

Diners Club:

Merchant guarantee (in millions)

$

224

PULSE:

ATM guarantee (in thousands)

$

833

With regard to the
counterparty settlement guarantees discussed above, the Company believes that the estimated amounts of maximum potential future payments are not representative of the Companys actual potential loss exposure given Diners Clubs and
PULSEs insignificant historical losses from these counterparty exposures. As of August 31, 2010, the Company had not recorded any contingent liability in the condensed consolidated financial statements for these counterparty exposures,
and management believes that the probability of any payments under these arrangements is low.

The Company also retains
counterparty exposure for the obligations of Diners Club licensees that participate in the Citishare network, an electronic funds processing network. Through the Citishare network, Diners Club customers are able to access certain ATMs directly
connected to the Citishare network. The Companys maximum potential future payment under this counterparty exposure is limited to $15 million, subject to annual adjustment based on actual transaction experience. However, as of August 31,
2010, the Company had not recorded any contingent liability in the condensed consolidated financial statements related to this counterparty exposure, and management believes that the probability of any payments under this arrangement is low.

Merchant Chargeback Guarantees. The Company issues credit cards and owns and operates the Discover Network. The
Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the credit card customer and a merchant. The contingent liability arises if the disputed transaction involves a merchant or
merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the customers favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn
credits its customers account. The Discover Network will then charge back the transaction to the merchant or merchant acquirer. If the Discover Network is unable to collect the amount from the merchant or merchant acquirer, it will bear the
loss for the amount credited or refunded to the customer. In most instances, a payment obligation by the Discover Network is unlikely to arise because most

products or services are delivered when purchased, and credits are issued by merchants on returned items in a timely fashion. However, where the product or service is not scheduled to be provided
to the customer until some later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. The maximum potential amount of future payments related to such contingent obligations is estimated to
be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. However, the Company believes that such amount is
not representative of the Companys actual potential loss exposure based on the Companys historical experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or
cumulative transaction volumes may include or result in disputed transactions.

Represents period transactions processed on the Discover Network to which a potential liability exists which, in aggregate, can differ from credit card sales volume.

The Company has not recorded any contingent liability in the condensed consolidated financial statements
related to merchant chargeback guarantees at August 31, 2010 and November 30, 2009. The Company mitigates this risk by withholding settlement from merchants or obtaining escrow deposits from certain merchant acquirers or merchants that are
considered higher risk due to various factors such as time delays in the delivery of products or services. The table below provides information regarding the settlement withholdings and escrow deposits, which are recorded in interest-bearing deposit
accounts and accrued expenses and other liabilities on the Companys condensed consolidated statements of financial condition (in thousands):

August 31,2010

November 30,2009

Settlement withholdings and escrow deposits

$

31,702

$

38,129

14.

Litigation

The Company
filed a lawsuit captioned Discover Financial Services, Inc. v. Visa USA Inc., MasterCard Inc. et al. in the U.S. District Court for the Southern District of New York on October 4, 2004. Through this lawsuit the Company sought to recover
substantial damages and other appropriate relief in connection with Visas and MasterCards illegal anticompetitive practices that, among other things, foreclosed the Company from the credit and debit network services markets. The Company
executed an agreement to settle the lawsuit with MasterCard and Visa for up to $2.75 billion on October 27, 2008, which became effective on November 4, 2008 upon receipt of the approval of Visas Class B shareholders. At the time of
the Companys 2007 spin-off from Morgan Stanley, the Company entered into an agreement with Morgan Stanley regarding the manner in which the antitrust case against Visa and MasterCard was to be pursued and settled, and how proceeds of the
litigation were to be shared (the Special Dividend Agreement).

On October 21, 2008, Morgan Stanley filed a
lawsuit against the Company in New York Supreme Court for New York County seeking a declaration that Morgan Stanley did not breach the Special Dividend Agreement, did not interfere with any of the Companys existing or prospective agreements
for resolution of the antitrust case against Visa and MasterCard, and that Morgan Stanley is entitled to receive a portion of the settlement proceeds as set forth in the Special Dividend Agreement. On November 18, 2008, the Company filed its
response to

Morgan Stanleys lawsuit, which included counterclaims against Morgan Stanley for interference with the Companys efforts to resolve the antitrust lawsuit against Visa and MasterCard
and willful and material breach of the Special Dividend Agreement, which expressly provided that the Company would have sole control over the investigation, prosecution and resolution of the antitrust lawsuit.

Subsequent to a ruling by the New York State Court, the Company estimated that the amount that was probable it would owe to Morgan
Stanley was $837.7 million as of November 30, 2009. Of this amount, $808.8 million was recorded as Special dividendMorgan Stanley in liabilities on the statement of financial condition with an offset to retained earnings and $28.9 million
of interest related to delayed payment was recorded in other expense. On February 11, 2010, the Company entered into a Settlement Agreement and Mutual Release with Morgan Stanley, in which each party released and discharged the other party from
claims related to the sharing of proceeds from the antitrust suit against Visa and MasterCard. On the same day, the Company entered into a First Amendment to the Separation and Distribution Agreement dated as of June 29, 2007 (the First
Amendment) with Morgan Stanley. The First Amendment provides that payments that Morgan Stanley receives from the Company in connection with the settlement of the antitrust litigation with Visa and MasterCard shall not exceed a total of $775
million, inclusive of any accrued and unpaid interest and fees under the agreement. In addition, on the same day, the Company paid Morgan Stanley $775 million from restricted cash held in an escrow account in complete satisfaction of its obligations
under the Special Dividend Agreement.

Upon payment of the $775 million on February 11, 2010, the Company reversed the
$28.9 million that had been recorded in other expense in the fourth quarter 2009 and recorded a reduction to the liability attributable to the special dividend from $808.8 million to $775 million with an offsetting increase to retained earnings.

15.

Fair Value Disclosures

The Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain
fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial
instrument. These techniques involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a
material effect on the estimated fair value amounts.

The following table provides the estimated fair values of financial instruments (dollars in
thousands):

August 31, 2010

November 30, 2009

CarryingValue

EstimatedFair Value

CarryingValue

EstimatedFair Value

Financial Assets

Cash and cash equivalents

$

7,916,091

$

7,916,091

$

13,020,719

$

13,020,719

Restricted cashspecial dividend escrow

$



$



$

643,311

$

643,311

Restricted cashfor securitization
investors(1)

$

691,698

$

691,698

$



$



Other short-term investments

$

375,000

$

375,000

$

1,350,000

$

1,350,000

Investment securities:

Available-for-sale(1)

$

1,151,689

$

1,151,689

$

2,645,481

$

2,645,481

Held-to-maturity(1)

$

74,058

$

73,029

$

2,389,816

$

1,953,990

Net loan
receivables(1)

$

46,386,943

$

46,482,449

$

21,867,185

$

21,984,317

Amounts due from asset
securitization(1)

$



$



$

1,692,051

$

1,692,051

Derivative financial instruments

$

1,370

$

1,370

$

1,369

$

1,369

Financial Liabilities

Deposits

$

34,246,804

$

35,404,706

$

32,093,012

$

33,139,823

Long-term borrowingsowed to securitization
investors(1)

$

14,869,265

$

15,217,056

$



$



Other long-term borrowings

$

2,839,488

$

3,156,018

$

2,428,101

$

2,524,320

Derivative financial instruments

$

634

$

634

$



$



(1)

Upon adoption of Statements No. 166 and 167 on December 1, 2009, the Company consolidated the securitization trusts. Loan receivables increased by the amount
of securitized loans and long-term borrowings increased by the amount of debt issued from the trusts to third-party investors. Furthermore, applicable amounts of held-to-maturity and available-for-sale investment securities were reclassified to loan
receivables, while amounts recorded as due from asset securitization were either reclassified or reversed. See Note 2: Change in Accounting Principle for more information.

Fair Value of Assets and Liabilities Held at August 31, 2010. Below are descriptions of the techniques used to
estimate the fair value of financial instruments on the Companys statement of financial condition as of August 31, 2010.

Cash and cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the low level of risk
these assets present to the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.

Restricted cash. The carrying value of restricted cash approximates fair value due to the relatively liquid nature of these
assets, particularly given the short maturities of the assets in which the restricted cash is invested.

Other short-term
investments. The carrying value of other short-term investments approximates fair value due to the low level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given their maturities
of less than one year.

Held-to-maturity investment securities. Held-to-maturity investment securities are generally valued using the estimated fair
values based on quoted market prices for the same or similar securities.

Net loan receivables. The Companys loan
receivables include credit card and installment loans to consumers and credit card loans to businesses. To estimate the fair value of loan receivables, loans are

aggregated into pools of similar loan types, characteristics and expected repayment terms. The fair values of the loans are estimated by discounting expected future cash flows using a rate at
which similar loans could be made under current market conditions.

Deposits. The carrying values of money market
deposits, non-interest bearing deposits, interest-bearing demand deposits and savings deposits approximate their fair values due to the liquid nature of these deposits. For time deposits for which readily available market rates do not exist, fair
values are estimated by discounting expected future cash flows using market rates currently offered for deposits with similar remaining maturities.

Other long-term borrowings. Fair values of
other long-term borrowings are determined utilizing current observable market prices for those transactions, if available. If there are no observable market transactions, then fair values are determined by discounting cash flows of future interest
accruals at market rates currently offered for borrowings with credit risks, similar remaining maturities and repricing terms.

Derivative financial instruments. The Companys derivative activity consists of interest rate swaps and foreign currency
forward contracts. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and option volatility.The fair values of interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived
from observable market interest rate curves.

Fair Value of Assets Held at November 30, 2009. Below are
descriptions of the techniques used to calculate the fair value of financial instruments on the Companys statements of financial condition as of November 30, 2009 which were subsequently derecognized, reclassified or eliminated in
consolidation as a result of the adoption of Statements No. 166 and 167 on December 1, 2009.

Available-for-sale
investment securities. Fair value of certain certificated subordinated interests issued by DCENT that were acquired by a wholly-owned subsidiary of the Company were estimated utilizing discounted cash flow analyses, where estimated contractual
principal and interest cash flows were discounted at rates derived from indicative pricing observed in the most recent active market for such instruments, adjusted for changes reflective of incremental credit risk, liquidity risk, or both.

Held-to-maturity investment securities. The estimated fair values of certain certificated subordinated interests
issued by DCENT and DCMT were derived utilizing a discounted cash flow analysis, where estimated contractual principal and interest cash flows were discounted at rates interpolated from recent pricing observed on similar asset classes, adjusted for
incremental credit risk, liquidity risk, or both, to reflect, for example, the risk related to the lower rating on the instrument being valued than that which was observed. As a portion of these investment securities were zero coupon certificated
retained interests, the aggregate carrying value, or amortized cost, significantly exceeded fair value.

Amounts due from
asset securitization. Carrying values of the portion of amounts due from asset securitization that were short term in nature approximated their fair values. Fair values of the remaining assets recorded in amounts due from asset securitization
reflected the present value of estimated future cash flows utilizing managements best estimate of key assumptions with regard to credit card loan receivable performance and interest rate environment projections.

Assets and Liabilities Measured at Fair Value on a Recurring Basis. ASC 820
defines fair value, establishes a fair value hierarchy that distinguishes between valuations that are based on observable inputs from those based on unobservable inputs, and requires certain disclosures about those measurements. The table below
presents information about the Companys assets and liabilities measured at fair value on a recurring basis at August 31, 2010, and indicates the level within the fair value hierarchy with which each of those items is associated. In
general, fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs
are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive
markets, quoted prices for the identical assets in an inactive market, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Fair
values determined by Level 3 inputs are those based on unobservable inputs, and include situations where there is little, if any, market activity for the asset or liability being valued. In instances in which the inputs used to measure fair value
may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Disclosures concerning assets and liabilities measured at fair value on a recurring basis are as follows (dollars in thousands):

Quoted Prices inActive Marketsfor IdenticalAssets (Level
1)

SignificantOtherObservableInputs (Level 2)

SignificantUnobservableInputs (Level 3)

Total

Balance at August 31, 2010

Assets

Credit card asset-backed securities of other issuers

$



$

1,149,666

$



$

1,149,666

U.S. Treasury securities

1,002





1,002

U.S. government agency securities



1,004



1,004

Equity securities





17

17

Available-for-sale investment securities

$

1,002

$

1,150,670

$

17

$

1,151,689

Derivative financial instruments

$



$

1,370

$



$

1,370

Liabilities

Derivative financial instruments

$



$

634

$



$

634

Balance at November 30, 2009

Assets

Available-for-sale investment securities

$

15

$



$

2,645,466

$

2,645,481

Amounts due from asset
securitization(1)

$



$



$

940,164

$

940,164

Derivative financial instruments

$



$

1,369

$



$

1,369

(1)

Balances represent only the components of amounts due from asset securitization that are marked to fair value.

The Company considers relevant and observable market prices in its fair value calculations, evaluating the frequency of transactions, the
size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair
values of the related assets or liabilities would be classified as Level 2. If relevant and observable prices are not available, other valuation techniques would be used and the fair values of the financial instruments would be classified as Level
3. The Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category. The level to which an asset or liability is classified is based upon the lowest level
of input that is

significant to the fair value measurement. If the fair value of an asset or liability is measured based on observable inputs as well as unobservable inputs which contributed significantly to the
determination of fair value, the asset or liability would be classified in Level 3 of the fair value hierarchy.

At
August 31, 2010, amounts reported in credit card asset-backed securities issued by other institutions reflected senior-rated Class A securities having a par value of $1,048 million and more junior-rated Class B and Class C securities with
par values of $50 million and $42 million, respectively. The Class A securities had a weighted-average coupon of 2.56% and a weighted-average remaining maturity of 10.5 months, the Class B, 0.62% and 20.6 months, respectively, and the Class C,
0.74% and 15.6 months, respectively. The underlying loans for these securities are predominantly prime general-purpose credit card loan receivables. The Company utilizes an external pricing source for the reported fair value estimates of these
securities. The expected cash flow models used by the pricing service utilize observable market data to the extent available and other valuation inputs such as benchmark yields, reported trades, broker quotes, issuer spreads, bids and offers, the
priority of which may vary based on availability of information. We further assess the reasonableness of the price quotations received from the external pricing source by reference to indicative pricing from another independent, nationally
recognized provider of capital markets information.

At November 30, 2009, the amount reported in asset-backed commercial
paper notes included in available-for-sale investment securities was related to mortgage-backed commercial paper notes of Golden Key U.S. LLC. At that time, the estimated fair value reflected an estimate of the market value of those assets held by
the issuer, which was primarily reliant upon unobservable data as the market for mortgage-backed securities had continued to experience significant disruption. The collateral supporting these notes was liquidated during the third quarter of 2010.
See Note 3 Investment Securities for further discussion of this investment.

The following tables provide changes in the
Companys Level 3 assets and liabilities measured at fair value on a recurring basis. Net transfers into and/or out of Level 3 are presented using beginning of the period fair values excluding purchases and other settlements. Excluding
purchases and other settlements, the Company had no significant transfers between Levels 1, 2 or 3 during the second or third quarter of 2010, the effective periods for the new disclosure requirements prescribed by ASU No. 2010-06.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following are the amounts recognized in earnings and other comprehensive income related
to assets categorized as Level 3 during the respective periods (in thousands):

For the Three Months EndedAugust 31,

For the Nine Months EndedAugust 31,

2010

2009

2010

2009

Interest incomeinterest accretion

$



$

4,878

$



$

11,213

Other incomegain (loss) on investment securities

19,556

(7,422

)

19,556

(8,249

)

Securitization incomenet revaluation of retained interests



68,880



(122,315

)

Amount recorded in earnings

19,556

66,336

19,556

(119,351

)

Unrealized gains (losses) recorded in other comprehensive income, pre-tax

(12,395

)

43,467

(7,455

)

65,289

Total realized and unrealized gains (losses)

$

7,161

$

109,803

$

12,101

$

(54,062

)

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. The Company
also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets,
measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired. During the nine months ended August 31, 2010, the Company had no impairments related to these assets.

As of August 31, 2010, the Company had not made any fair value elections with respect to any of its eligible assets and
liabilities as permitted under ASC 825-10-25.

16.

Derivatives and Hedging Activities

The Company uses derivatives to manage its exposure to various financial risks. The Company entered into interest rate swap agreements as
part of its interest rate risk management program. The Company also entered into foreign exchange forward contracts to manage the gains and losses that arise from certain foreign currency denominated receivables of one of its subsidiaries. The
foreign exchange forward contracts are not designated as hedges, but provide a hedge of the volatility in earnings that arises from converting foreign denominated balance sheet items into the functional currency. The Company does not enter into
derivatives for trading or speculative purposes. All derivatives are recorded in other assets at their gross positive fair values and in accrued expenses and other liabilities at their gross negative fair values.

Derivatives may give rise to counterparty credit risk. The Company enters into derivative transactions with established dealers that meet
minimum credit criteria established by the Company. All counterparties must be pre-approved prior to engaging in any transaction with the Company. Counterparties are monitored on a periodic basis by the Company to ensure compliance with the
Companys risk policies and limits.

Derivatives Designated as Hedges

Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest
rate risk, are considered fair value hedges.

Cash Flow Hedges. The Company uses interest rate swaps to manage its
exposure to changes in interest rates related to future cash flows resulting from credit card loan receivables. These transactions are hedged for a

maximum period of three years. The derivatives are designated as a hedge of the risk of overall changes in cash flows on the Companys portfolios of prime-based interest receipts and qualify
for hedge accounting in accordance with ASC Topic 815, Derivatives and Hedging (ASC 815).

The effective
portion of the change in the fair value of derivatives designated as cash flow hedges is recorded in other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted cash flows affect earnings. The
ineffective portion of the change in fair value of the derivative is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to derivatives at August 31, 2010 will be reclassified to interest income
as interest payments are received on certain of its floating rate credit card loan receivables. During the next 12 months, the Company estimates it will reclassify to earnings $6.1 million of gains, pre-tax, related to its derivatives designated as
cash flow hedges.

Fair Value Hedges. The Company is exposed to changes in fair value of certain of its fixed rate
obligations due to changes in interest rates. As of August 31, 2010, the Company had no fair value hedges. During the nine months ended August 31, 2009, the Company used interest rate swaps from time to time to manage its exposure to
changes in fair value of these obligations attributable to changes in LIBOR, a benchmark interest rate as defined by ASC 815. These interest rate swaps involved the receipt of fixed rate amounts from counterparties in exchange for the Company making
payments of variable rate amounts over the life of the agreements without exchange of the underlying notional amount. Most of these agreements were designated to hedge interest-bearing deposits and qualify as fair value hedges in accordance with ASC
815. Changes in both the fair value of the derivatives and the hedged interest-bearing deposits relating to the risk being hedged were recorded in interest expense and provided offset to one another. Ineffectiveness related to these fair value
hedges, if any, was recorded in interest expense.

Derivatives not Designated as Hedges

Foreign Exchange Forward Contracts. The Company has derivatives that are economic hedges and are not designated as hedges for
accounting purposes. The Company enters into foreign exchange forward contracts to manage foreign currency risk. Foreign exchange forward contracts involve the purchase or sale of a designated currency at an agreed upon rate for settlement on a
specified date. Changes in the fair value of these contracts are recorded in other income.

Interest Rate Swaps. The
Company also may have from time to time interest rate swap agreements that are not designated as hedges. Such agreements are not speculative and are also used to manage interest rate risk but are not designated for hedge accounting. Changes in the
fair value of these contracts are recorded in other income.

The following table summarizes the fair value (including accrued interest) and related
outstanding notional amounts of derivative instruments, as well as the location they are reported in the statement of financial condition as of August 31, 2010 and November 30, 2009 (dollars in thousands):

August 31, 2010

November 30, 2009

Balance Sheet Location

Balance Sheet Location

NotionalAmount

Number ofTransactions

OtherAssets(At FairValue)

AccruedExpenses
andOtherLiabilities(At FairValue)

NotionalAmount

OtherAssets(At FairValue)

AccruedExpenses
andOtherLiabilities(At FairValue)

Derivatives designated as hedges:

Interest rate swapsCash flow hedge

$

1,250,000

5

$

1,327

$

634

$



$



$



Interest rate swapsFair value hedge

$





$



$



$

16,048

$

400

$



Derivatives not designated as hedges:

Foreign exchange forward
contracts(1)

$

7,643

2

$

43

$



$



$



$



Interest rate swaps

$





$



$



$

46,952

$

969

$



(1)

The foreign exchange forward contracts have notional amounts of EUR 4 million and GBP 1.7 million as of August 31, 2010.

The following table summarizes the impact of the derivative instruments on income, as well as the location they are reported in the
financial statements for the three and nine months ended August 31, 2010 and 2009 (dollars in thousands):

For the three months
endedAugust 31

For the nine months
endedAugust 31,

Location

2010

2009

2010

2009

Derivatives designated as hedges:

Interest Rate Swaps-Cash Flow Hedges:

Gain (loss) recognized in other comprehensive income after amounts reclassified into earnings, pre-tax

OtherComprehensiveIncome

$

251

$



$

251

$



Total gains (losses) recognized in other comprehensive income

$

251



$

251



Amounts reclassified from other comprehensive income into earnings

Interest Income

$

442

$



$

442

$



Net hedge ineffectiveness

Other Income









Gain (loss) excluded from assessment of hedge effectiveness

Interest Income









Interest Rate Swaps-Fair Value Hedges:

Gain (loss) on interest rate
swaps(1)

Interest Expense



167

44

7,745

Gain (loss) on hedged
item(2)

Interest Expense



2,907



8,425

Total gains (losses) recognized in income

$

442

$

3,074

$

486

$

16,170

Derivatives not designated as hedges:

Gain (loss) on forward contract

Other Income

$

(301

)

$



$

458

$



Gain (loss) on interest rate swaps

Other Income



166

6

1,767

Total gains (losses) on derivatives not designated as hedges recognized in income

$

(301

)

$

166

$

464

$

1,767

(1)

For the three and nine months ended August 31, 2009, the gain (loss) on derivative includes ineffectiveness of $105 thousand and $1.2 million respectively.

(2)

For the three and nine months ended August 31, 2009, the gain (loss) on hedged item includes ineffectiveness of $36 thousand and $(2.2) million respectively.

For its interest rate swaps, the Company has master netting arrangements and minimum collateral posting thresholds with its
counterparties. Collateral is required by either the Company or the counterparty depending on the net fair value position of all interest rate swaps held with that counterparty. Collateral amounts recorded in the consolidated statement of financial
condition are based on the net collateral receivable or payable position for each counterparty. Collateral receivable or payable amounts are not offset against the fair value of the interest rate swap, but are recorded separately in other assets or
deposits. As of August 31, 2010, the Company had swaps in a net liability position with one of its counterparties, the fair value of which was $3 thousand, inclusive of accrued interest. As of August 31, 2010, the Company had a right to
reclaim cash collateral of $0.6 million based on these agreements and had no obligation to return cash collateral. If the Company had breached any provisions of the derivative agreements, it could have been required to settle its obligations under
the agreements at their termination value, which was $3 thousand at August 31, 2010.

The Company has agreements with
certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company
could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its
derivative counterparties that contain provisions that require Discover Banks debt to maintain an investment grade credit rating from specified major credit rating agencies. If Discover Banks credit rating is reduced to below investment
grade, the Company would be required to post additional collateral, which, as of August 31, 2010, would have been $20 million.

17.

Segment Disclosures

The
Companys business activities are managed in two segments: Direct Banking and Payment Services.

Direct
Banking. The Direct Banking segment includes Discover card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer products and services, including personal loans, student loans, prepaid
cards and other consumer lending and deposit products offered through the Companys Discover Bank subsidiary.

Payment Services. The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds
transfer network; Diners Club, a global payments network; and the Companys third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties.

The business segment reporting provided to and used by the Companys chief operating decision maker is prepared using the following
principles and allocation conventions:



Prior to adoption of Statements No. 166 and 167, segment information was presented on a managed basis because management considered the
performance of the entire managed loan portfolio in managing the business. A managed basis presentation, which is a non-GAAP presentation, involved reporting securitized loans with the Companys owned loans and reporting the earnings on
securitized loans in the same manner as the owned loans instead of as securitization income. Although similar, a managed basis presentation is not the same as presenting a full consolidation of the trusts, and therefore, certain information may not
be comparable between current and prior periods, particularly related to net interest income, provision for loan losses and other income. Subsequent to the consolidation of securitized assets and liabilities in connection with the adoption of
Statements No. 166 and 167, there is no distinction between securitized and non-securitized assets on a GAAP basis. See Note 2: Change in Accounting Principle for more information.

Other accounting policies applied to the operating segments are consistent with the accounting policies described in Note 2: Summary of Significant
Accounting Policies to the audited consolidated financial statements included in the Companys annual report on Form 10-K for the year ended November 30, 2009.



Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct Banking segment.



Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing and infrastructure costs that are not
specifically allocated among the operating segments.



The assets of the Company are not allocated among the operating segments in the information reviewed by the Companys chief operating decision
maker.



Income taxes are not specifically allocated among the operating segments in the information reviewed by the Companys chief operating decision
maker.

The following tables present segment data on a GAAP basis for the three and nine months ended
August 31, 2010 and on a managed basis with a reconciliation to a GAAP presentation for the three and nine months ended August 31, 2009 (dollars in thousands):